Kenya Offers Escape Route for Nigeria Bond Market Woes

(Bloomberg) — Investors skittish about Nigerian assets as plunging oil prices pummel the West African nation’s economy are casting their eyes across the continent to Kenya.

Yields on Kenya’s 10-year Eurobonds, which were 128 basis points higher than comparable Nigerian debt when they were sold in June, are now 55 basis points lower, according to data compiled by Bloomberg. The East African nation’s local-currency securities have returned 0.4 percent in dollar terms this year, compared with an 8.3 percent loss on naira debt, Bloomberg indexes show.

The World Bank raised its growth forecast for Kenya on March 5, saying oil prices that have tumbled 48 percent since June would boost the economy of the nation, a net importer of crude. By contrast, Nigeria is set to slow, the International Monetary Fund said the same day. The continent’s biggest oil producer is struggling with falling export revenue and a loss of investor confidence after it postponed elections amid the insurgency by the Islamist group Boko Haram in the country’s northeast.

“Some investors think it makes more sense to be overweight Kenya versus Nigeria,” Mahan Namin, a money manager at Insparo Asset Management Ltd., which sold its Nigerian sovereign bonds last year and has bought more Kenyan debt in 2015, said by phone from London on March 10. “The divergence with Nigeria is a case of Kenya’s revenue base being more diversified and oil prices being lower.”
Creating Jobs

Kenya, with 41 million people and a gross domestic product of $55 billion, is the biggest economy in East Africa, with tea, coffee and tourism among its main sources of foreign exchange. Investments in infrastructure, agriculture and manufacturing are creating more jobs and should increase growth to 7 percent by 2017, the World Bank said after upgrading this year’s projection to 6 percent from 4.7 percent.

While Nigeria dwarfs Kenya with its $520 billion economy and population of 170 million, it relies on oil for 90 percent of export earnings and 70 percent of government revenue. The plunge in oil prices will slow growth to 4.8 percent in 2015, compared with 6.3 percent in 2014, the IMF said.

“Kenya has managed to diversify,” Lamin Manjang, Chief Executive Officer of Standard Chartered Plc’s East Africa unit, said by e-mail on March 9. “It is not a commodity-driven economy” like Nigeria, he said.

Morgan Stanley and Aberdeen Asset Management Plc. were among investors that said they sold all their Nigerian local bonds in the past six months as the naira weakened 18 percent against the dollar, the most among 24 African currencies tracked by Bloomberg. Kenya’s shilling depreciated 3.1 percent in the period.
‘Currency Outperformed’

“The currency has definitely outperformed Nigeria’s,” Kaan Nazli, a senior economist at Neuberger Berman Europe Ltd. in The Hague, said by phone on March 9. “It’s helped Kenya,”

Yields on Nigeria’s $500 million of bonds due July 2023, rated three levels below investment grade by Moody’s Investors Service, climbed 92 basis points in the past year to 6.98 percent by 10:28 a.m. in Lagos. Yields on Kenya’s $2 billion of debt due June 2024, rated one level lower, dropped 19 basis points since a sale in June to 6.41 percent.

The yield divergence will continue at least until after Nigeria’s presidential election on March 28 and as long as oil prices stay low, according to Marco Ruijer, who helps manage $7 billion of emerging-market debt at ING Investment Management BV in The Hague.

The conflict with Boko Haram in northern Nigeria, which claimed at least 1,600 lives in January and more than 4,700 in 2014, led officials to delay national elections scheduled for Feb. 14 by six weeks. The vote is set to be the most closely contested since the end of military rule in 1999.

“There’s a lot of political turmoil in Nigeria and it’s trading almost one-for-one with oil prices,” Ruijer said by phone on March 6. “If oil remains around $60 a barrel, then Kenya will trade inside Nigeria. If prices rise to $70 or $80, that gap should disappear.”